HL Deb 22 November 1949 vol 165 cc895-919

6.24 p.m.

Order of the Day for the Second Reading read.

THE MINISTER OF CIVIL AVIATION (LORD PAKENHAM)

My Lords, I rise to move the Second Reading of the Profits Tax Bill. This Bill has a simple purpose: it is to raise the rate of profits tax on distributed profits from 25 to 30 per cent. I shall be very ready to try to reply to any points raised by the distinguished speakers who are to follow me, but in my opening remarks, which will be fairly but not unduly brief, I shall stick with some severity to the Bill itself. The Bill raises the rate of tax on distributed profits from 25 to 30 per cent. It leaves the rate on undistributed profits at 10 per cent. Therefore, it does not fall on any money set aside by companies towards reserves. The change will come into force as from the end of September last, and the increase in tax will yield £24,000,000 gross in a full year—that is, £13,000,000 net revenue after consequent loss of income tax. The provisions which give effect to this proposal are somewhat complicated but I think they are not a matter of controversy, and I will pass on to the principles and justification behind the Bill.

When the Chancellor of the Exchequer first made this proposal in another place, he said that the consequence of devaluation would be two-fold: first, a higher return in sterling for hard currency exports, and secondly, a small increase in the internal price level of the country. The lower income groups would, on the whole, by reason of the higher internal prices, make a greater sacrifice propor- tionately than the rest of the community. To give one example, the increase in the price of bread falls more heavily on the poor than on the rich, as we know well. By contrast, the profit-earning section of the community, again broadly speaking, would tend to benefit from both the consequences of devaluation. When I talk of the "profit-earning section," may I hasten to say that, as a somewhat passive member of that fraternity, I do not allude to them in any pejorative way. I am simply talking hard economics and not passing any kind of moral judgment—I certainly would not do any such thing. Broadly speaking, it is true that the profit-earning section would benefit from devaluation.

Moreover, the cuts which were recently discussed in your Lordships' House and judged inadequate by a certain vehement spokesman also tend to bear more heavily on the poor than on the rich. In order to anticipate dialectical argument, I would agree that the profit earner in this sense is in some cases not a rich man, but the broad argument I have presented holds good. Therefore, in the words of my right honourable friend the Chancellor of the Exchequer, this Bill is a measure of rough justice. I would submit that any broad fiscal measure of this kind cannot be selective, and, whether we like it or not, tends to be rough justice. In the opinion of the Government, the Bill makes a modest but essential contribution to the fight against inflation. That is why the Government consider this measure both necessary and just. In addition, the Bill has the advantage of widening the gap between the rates of tax on distributed and undistributed profits, thereby increasing the incentive of companies to put their profits to reserve.

I should now like to come to the objections. It may be late when I rise to reply and, therefore, I will attempt at this stage to deal with some of the broader issues which may be raised by subsequent speakers, although, of course, I hope to be able to add a few words at the end. I have mentioned one kind of incentive. And let me dwell on the word "incentive" for more than a moment or two. Whenever any extra taxation of this nature is imposed, the cry is raised in certain quarters, with complete sincerity, that in some sense taxation of this kind reduces the natural incentive on the part of entrepreneurs (as we used to call them; I do not know whether the word is so much employed to-day) to earn maximum profits and produce everything within their power. In our present economic situation, incentives are surely required not only for the comparatively small number of dividend receivers but also for the very much larger number of those whose sole or main income is derived from wages or small salaries—a point not always made, and one which perhaps I sometimes fail to make myself in our discussions here. But from the point of view of general incentive to increased work throughout the community, I submit strongly that any policy which appeared to be palpably unjust and to favour the profit receivers against the rest would diminish the total incentive throughout the nation. This danger was foreseen in another place by the honourable Baronet, Sir Ralph Glyn, a highly respected member of the Opposition, who agreed to the necessity in present circumstances of showing the working people of the country that investors, too, are making their sacrifice—I believe I am representing correctly what Sir Ralph Glyn said.

In bringing forward this measure the Government face clearly and resolutely the fact that, to maintain fairness to all, sacrifices are necessary all round. At the risk of headlining a single sentence in my own speech, may I say that that is the keynote of what I want to lay before the House this afternoon? The Bill attempts to distribute those sacrifices in a manner that I believe is broadly recognised as just. The measure does not stand alone, of course, but rounds off or complements the cuts which we have already discussed. It helps, therefore, to defeat inflation, as I suggested just now, and to promote confidence in the value of our money; and that itself, of course, is an all-important incentive. The Bill is also indispensable in creating the atmosphere to elicit great national efforts. We are all agreed that great national efforts are vital if we are to pull through, and that those efforts must be made for rewards which, in the short run, must be lower on the average than previously if our standard of life is to be recovered and improved on in the end. So much for what we sometimes overlook—namely, the incentive to the nation as a whole.

But even if we confine ourselves to the profit-receiving class (again, I do not use the term in any tone of condemnation, or anything of the kind) I cannot for a moment agree that incentive will be reduced. The increase in total tax—that is, income tax and profits tax together—as the honourable Member for Blackley, Mr. Diamond, an expert accountant, said in another place, will work out, when allowance is made for the consequential reduced burden of income tax, at only an extra 2¾ per cent. —that is, 7d. in the £ on distributed profits. That is the extra burden we are placing on the profit earner. In another place, I understand, a member of the Opposition went so far as to describe this Bill as footling, in the sense that it produced only £13,000,000 additional revenue. I do not agree with that use of words, but I do agree that the increase in tax is so small that it represents an insignificant addition to the burden already carried by the profit earner, an increase which can by no stretch of imagination be described as one which will materially reduce incentive.

But let us come closer to this question of incentive and the influence on incentive of profits tax, without arguing the precise impact of the Bill. Let us look at the actual situation in industry since the time when the profits tax in its present form was imposed by the Chancellor of the Duchy of Lancaster when he was Chancellor of the Exchequer. The first point to observe is surely that total production, however measured, has risen substantially. I will not to-night embark on an argument with the noble Lord, Lord Cherwell, as to whether it has risen by 35, 30 or 25 per cent.; but I hope the noble Lord will not arrest me in my flight if I assert that production has increased substantially since that time. That, surely, is self-evident, apart from statistical information, if we observe that the nation's industrial capacity has been fully deployed over the last two years. Surely that disposes of the argument that the profits tax in a general way has acted to restrict industrial production.

VISCOUNT SIMON

Is the argument that it has encouraged it?

LORD PAKENHAM

I am sure the noble and learned Viscount would not wish to "guy" my argument. Therefore, I cannot quite see the meaning of his intervention. Of course, I was not saying that it had encouraged production. What I did say was that it did not discourage production, if we believe the evidence before our eyes. I am sure the noble Viscount does not wish to parody my remarks, because he is the most fair of reasoners.

I come now to the second point which I think is worth observing, and which is familiar to all—namely, that our export trade has achieved levels half as high again as those ruling before the war, a time when profits tax was only 5 per cent. and, indeed, when the rate of income tax was not much more than half what it is now. The profits tax does not seem to have retarded the general level of the export trade. Thirdly, if we look at the question of incentive in relation to industrial expansion it is worth observing that not only is industry at the present time drawing on all available supplies of labour and materials, but at this moment there are more business men—I understand considerably more—who are seeking to obtain licences from the Board of Trade for building factories than there are resources which would enable the Board of Trade to issue the building licences required. So, if we judge by the experience of the Board of Trade, who are having to stop business men from building factories because the resources are simply not there, it is surely untrue to argue, as has often been argued most sincerely in this House, that there is a shortage of risk-bearing capital. If that is so, how is it that all these business men are so anxious to launch out? That is a point which those who wish to follow me and who are going to talk about the shortage of risk-bearing capital must find some way to answer. As I have said, expansion is going ahead as fast as is physically possible in this country, and it is a striking contrast to those times between the wars when the country left lying idle and wasting, indeed rotting, not only industrial capacity, but the skill and energy of some of the most valuable men in our country. That is surely a point against the fact that incentives are less than they were during the period between the wars, as is suggested by some noble Lords.

Let us come a little closer still to the argument that is sometimes presented. We are told, and rightly so, both by noble Lords opposite and by others, that everything must be done to give an incentive to those who are anxious and able to contribute to our exports to dollar markets. I agree that we must encourage them in every way. Devaluation gives them a sharp stimulus and a marked incentive. The increase in tax will in no way decrease the greater profitability that devaluation brings to exports to the dollar area, in contrast to our exports in other areas, since this profits tax will fall equally upon all profits, wherever earned. The large differential, if I may use that word, in favour of dollar exports brought about by devaluation will still remain, and there is nothing in this measure which will detract from the advantages provided by that differential. I am not now arguing that this brings a new advantage; I say that it does not in any way detract from the advantage given by devaluation.

Of course, it could be argued (I would not regard it as a fantastic argument; I do not know whether we shall hear it today) that the increase in the tax, if permitted at all, should not apply to profits resulting from the sales to hard-currency areas. I am bound to say that there are some people who would argue that those are the only profits which might reasonably be expected to bear the tax, because the exporters to those areas are the people who will get the chief benefit. But the more common criticism from opponents appears to be that this tax, if we are to accept it, should apply only to the non-dollar exports. I do not regard that as an absurd contention, but I am rather doubtful whether noble Lords will press it this afternoon. I would suggest myself that, quite apart from the obvious administrative difficulties—they are considerable—involved in the segregation of such profits from exports to those particular areas, it would be entirely inequitable and against the whole moral sense of most of us if additional profits arising from devaluation should go completely unscathed: if the substantial profits which the dollar exporters would get as a result of devaluation should go forward without bearing this burden. I think it would be very hard to stand here and argue that the dollar exporters—the people who are getting the substantial benefit of devaluation —should be the only people to bear this or any other kind of impost. Therefore, as between those who think that the dollar exporters should be the only people to bear the tax, and those who think they are the only people who should not bear the tax, we take a middle position and say they should undergo the same treatment as other exporters and producers.

I come to a second line of criticism, the first being the kind of criticism which is stimulated by the word "incentive." The second broad heading may be summed up in the word "reserves." It has been strongly argued in another place that the increase in the rate of tax would effectively fall on moneys placed to reserve, and would in consequence diminish funds available for re-equipment and modernisation of industry. Is that seriously maintained? Moneys placed to reserve should be, and generally are, a first charge on disposable profits. It is the dividend which comes last. The noble Lord may interrupt me, but I have always wished for the opportunity of investing money in any company led by the noble Lord, Lord Hawke. But if the dividend is to come first, I am a little more nervous. Luckily, I have nothing to spare. However, it is my understanding that the dividend comes last, and a good company director will never increase his dividend if it means that the moneys placed to reserve are inadequate. It is therefore surely fallacious to suggest that a higher rate of tax on distributed profits will adversely affect moneys placed to reserve. On the contrary, its result would normally mean that if the moneys placed to reserve would otherwise be inadequate, it would be necessary, to the extent of the increase in tax, to reduce the dividend from what might otherwise have been paid. The conclusion is, therefore, that the profits tax is effectively a tax on dividends. It certainly should be if the entrepreneurs and the people who run our great businesses play their part as we wish. The profits tax is, and should be, a tax on dividends and not on moneys placed to reserve.

However, even if there were something in this objection—and I cannot accept that there is, if we are all to play our part—the actual effect of this particular tax would be insignificant in relation to the sums currently placed to reserves, which are, even in real terms, larger than they were pre-war. The sums currently placed to reserves after paying the tax and after making allowance for the rise in prices are larger than pre-war. I would just remind the House that so far as the question of replacement of plant and machinery is concerned, the very substantial concession made to industry this year of increasing the initial depreciation allowance from 20 per cent. to 40 per cent. ought not to be forgotten. I feel that that particular concession, which I think has been widely welcomed here as elsewhere, is sufficient to answer those who maintain that the Government is unaware of the need for industry to provide out of its own resources for replacement of plant and machinery.

Finally, to take what I would call the third broad heading of objections, the point is made (not specifically in relation to the increase to tax, but in relation to tax on profits generally) that the taxation of profits is a factor in the production cost and, therefore, makes it harder for us to export. I will not attempt to bore your Lordships this afternoon with an academic argument designed to show that in normal circumstances profits tax is not a factor in production costs. I would recall to your Lordships' attention only what was quoted with considerable effect elsewhere—namely, the unanimous findings of the Colwyn Committee of 1927. Your Lordships will remember that the Colwyn Committee concluded that the broad argument that income tax—then the only tax on profits—is not a factor in production costs is true over practically the whole field and for practically the whole of the time. The Colwyn Committee concluded, therefore, that income tax is not a factor in the cost of production. I do not wish to add to that testimony, but I am quite ready to supplement it if your Lordships wish to dispute the findings of that most eminent body.

In conclusion, having studied with the House some of the objections which have been advanced against this measure and having touched upon the main arguments in its favour, on behalf of the Government I am asking the House to accept this measure as a contribution to be made by the profit-earning section of the community to the sacrifices called for from the nation as a whole. I cannot help mentioning what I think is accepted here and elsewhere, that the T.U.C., on behalf of the millions they represent, are shouldering with fine courage their share of the sacrifices, and I cannot believe that noble Lords opposite would wish to be behind the T.U.C. in this respect. We on these Benches agree cordially with the right honourable gentleman, Mr. R. A. Butler, who in another place, while opposing the Bill, made it clear that in the view of the Opposition the sacrifices required as a result of devaluation should be shared by everyone in the community. I know well that differences of opinion can arise in connection with various points of economic reasoning thrown up by this Bill, which I have touched upon no doubt too briefly but in an attempt to suit the convenience of the House. I am not asking noble Lords, therefore, in any way to abandon their economic principles or economic lines of thought. But I would ask your Lordships—and in particular those who are to follow me—to consider the Bill in the spirit I have stressed and in the context which I have mentioned.

The more one considers the purposes of the Bill, the more certain one becomes that this measure, rough justice though it admittedly is and, indeed, must be, is the only effective way of promoting that equality of sacrifice which we all agree is right, proper and indispensable if every one of us is going to make his full contribution at this time. I know well that at this moment we are all equally determined that we shall make our full contribution, and therefore I ask the House to give this Bill a Second Reading, realising that it casts new burdens on some, but recalling also that burdens are inevitably falling on all—which is not, perhaps, unnatural at a time when the fortunes of all of us and our families, whether our incomes come from dividends, salaries or wages, are equally at stake, as is the whole future of our country. I beg to move that this Bill be read a second time.

Moved, That the Bill be now read 2ª.—(Lord Pakenham.)

6.50 p.m.

VISCOUNT SIMON

My Lords, this is a Money Bill, certified as such by the Speaker of the House of Commons. Therefore, it is not necessary for the noble Lord who has just spoken to persuade the House or to get a majority in favour of the measure. It becomes law because the House of Commons has adopted it; and we in this House certainly would never obstruct its passing. But it is right, I think, that we should spend a few minutes, even at this late hour, in considering the measure and the way in which it has been expounded—very charmingly and, if I may say so, brilliantly. But I think I should like to examine a little more closely one or two of the observations made.

I am sure I may say, not only on my, own behalf but on behalf of every noble Lord present, that I can confirm with all seriousness the proposition with which the noble Lord began his speech and to which he returned at the end of it. It is and ought to be accepted by everyone. Undoubtedly, when there is a burden to be borne, it should be shared by the citizens of this country in proper proportion; if there is a sacrifice to be made, nobody wants the sacrifice to fall upon one section of the community while another section escapes. Speaking as I am, with complete sincerity, I think we might proceed on that basis. It is possible to have different views as to what is the way to achieve the desired object. But that does not mean that there is unwillingness on the part of any decent, respectable citizen to take a share and to bear his proper responsibility.

There are two particular arguments put forward, one of which is in the realm of economics and the other is psychological. I do not think I approach this particular tax with any prejudice, but I am afraid I have formed the view that, regarded as a financial measure, on its merits, it is a bad and unjustified tax. If I am asked what is the explanation of it—and, it may be, in the minds of many people the excuse for it—I answer that the real explanation and excuse are psychological; and I am far from excluding, that as being altogether irrelevant in the world in which we are now living. All attempts to produce solid economic arguments in its favour are covering up its real purpose. That purpose is to try to demonstrate that the appeal that devaluation should not be followed by wage increases is an appeal which should be accepted because other people besides wage earners are going to suffer, too. That is the truth of the matter; I am far from saying that you can get rid of it as being an irrelevant consideration. I try to face facts and look them in the face, and I say that the Chancellor of the Exchequer has made this proposal in order to make more persuasive the appeal that devaluation should not be followed by wage increases.

Let us then note this in passing. The pretence (for it is nothing more than a pretence) which was current eight or nine weeks ago that writing down the pound would not have in many directions an adverse effect on some prices at home, and on the position of many people, is no longer one that will serve. Of course there is a real advantage to be obtained for the time being if the best use is made of the opportunity—if we have to accept the ignominious position of writing down the pound. But we have to bear in mind that it also has what I have called in this House recently a boomerang effect. It is bound to have the effect of making life on a small income more difficult than before for people who have limited resources. That must be so; and I wish very much that it had been said a little more clearly and frankly in the first instance. Whatever opportunities and advantages devaluation of the pound may give—and Heaven knows we all want them to be seized as fully as possible—the advantages would be neutralised if they led to a substantial increase in wages. The Chancellor of the Exchequer sees that perfectly well; and of course, it is in that connection that he has thought it necessary, for what I have called a psychological reason, to say in effect: "While I am urging you not to make any claim for an increase in wages because of the rise in the cost of living, I am hitting the profit-receiving section of the community, too."

Let me here interpose my warm agreement with what was said by the noble Lord opposite when he acknowledged the strenuous and statesmanlike efforts that are being made by the Trades Union Congress General Council to restrain additional wage claims. They have a most difficult task, and everybody who tries to look at the situation broadly must feel a great respect for the efforts they have made. There are some important trades—the iron and steel trade is a notable example—who have themselves made the most admirable approach to the problem. I believe that with the consent of the whole trade they have agreed not to make a claim of this sort. My real complaint is that what has been done is characteristic of the Government attitude. They profess to regard the adverse consequences of devaluation in a sectional way, as if they fell only on the wage earner. That is not true. I cannot help thinking it would be a great ad vantage if the contrary were more boldly stated. The whole population suffers when the purchasing power of the pound falls. The person who in his or her old age draws a small income from investment of savings suffers in exactly the same way as the wage earner whose income does not buy so much. It seems to me a pity that there should be this sectional view of the matter, a view which is encouraged in some quarters, as though the disadvantages of devaluation were limited to the wage earner—whose wage will undoubtedly, owing to devaluation, tend to buy less because the value of the pound is likely to fall.

It may be said—and it is true—that there are a great many shareholders who are not very poor people. But our fiscal system has for a long time dealt with that matter. Our system deals with the difference between the rich and the poor very thoroughly. It is a system which imposes on larger incomes such swingeing taxes, whether the income comes from holding shares or anything else, as cannot be seen in any other country of the world. I am not making a "song and dance" about it, but that is the basis of our fiscal system, and it has been raised to heights which I think some people hardly realise. Therefore, my point is that the disadvantage which accompanies, or may accompany, devaluation is not really a disadvantage which is suffered by the wage earner as such. It is suffered by everybody who has a similar income. As for higher incomes, they are already well taken care of. The richer members of society are already skinned and bled by steep differential taxation which it would be difficult for even the most ingenious man—and for the noble Lord opposite who is a very ingenious man—to increase. I think that is the true view of the matter.

Yet the argument in the mind of the Chancellor of the Exchequer when he made the announcement on September 27, was plainly this: that if industry was going to take advantage of devaluation by working harder and exporting more, then he must see to it that shareholders did not benefit by larger profits. He said that, in reference to the average profit-earner, there would be a tendency on the whole to benefit by the change, especially in the case of exporters. I am sure that I wish nothing but good results from this step of devaluation which we have been forced to take, but I have a feeling that the Chancellor of the Exchequer greatly underestimated the difficulty of getting into the dollar market under the new conditions, though we ought all to recognise that great efforts are being made by many firms and companies. If his objective was to tax extra profits resulting from this switch-over, then surely the means adopted in this Bill are clumsy and extraordinary. More than once it has been pointed out that one of the ambitions which we ought to entertain, and one of the wishes of the Treasury, is that we should attract American capital to this country. But how is that encouraged by the Government saying to exporters, "If you do, and you really succeed in exporting, then we are going to increase the tax upon your profits"?

We all understand that the increase is only in the profits tax on distributed profits. At present, an industrial company is charged with profits tax before income tax is exacted—20 per cent. on distributed profits and 10 per cent. on profits which after taxation are put to reserve. The increase now proposed is to change the 20 per cent. to 25 per cent. That increase is to fall on all distributed profits, whether or not they are made by a new drive into the American market. If we take a company which with great effort—it may be at considerable risk—endeavours in the national interest to shift its sales to America, it surely cannot be disputed that this is a curious way of providing incentives to induce it to do so. Some people who talk about it seem to think that, almost automatically, thanks to devaluation, a company which is seeking export trade to America will get the whole benefit of the writing down of the pound.

I do not claim to know as much about business as business people do. In my professional life, I have been consulted by business people only when they have been in difficulties or could not understand their contracts. That is all I know about business, but I should have thought that one of the things which might easily happen would be that you find you must give to your American purchaser some portion of the benefit resulting from devaluation, and put up with a very small portion of the advantage which devaluation gives you. The result of a tax of this sort would seem to me in some cases to make all the difference between a company being able to attempt this new effort and not being able to do so. Surely, it is an odd thing that we should be prepared to step up the tax on profits just when many companies will need not a less but a greater incentive to switch their efforts from the sterling to the dollar market.

The noble Lord, Lord Pakenham, said just now something about how the tax would work out in practice. He emphasised that the increased tax is only on profit that is distributed. But I am speaking in the presence of some who know much more about this than I do, when I ask: Is that really the way in which a board of directors will have to consider the matter? A company which has to pay the tax has, I apprehend, to decide how to deal with its balance of profit as a whole. There is a figure worked out on the principles which the income tax accepts which says that there is x as the balance of profits for us to deal with. Of course, there is already a limitation of dividend in practice which is almost universal. While it is true that this tax is calculated only on the distributed profit, the tax is paid out of the common fund, and surely it is obvious that in many cases the extra money will be found for the Revenue by taking it out of what would otherwise go to reserve. I was astonished to hear the proposition that all that a board of directors have to consider is, "Have we made sufficient reserves?" and that the shareholder comes in at the end, if he comes in at all.

LORD PAKENHAM

My Lords, may I interrupt for a moment? I did not state the proposition in that extreme form, as I think the noble and learned Viscount will recall, but I did suggest that a prudent company would consider its reserves first.

VISCOUNT SIMON

The two things are considered very much together, but there is this consideration which I do not think the noble Lord has in mind. The directors have to think twice, when they have made a profit, before they reduce the regular rate of dividend. Not only have they a duty to their ordinary shareholders, because they have their money, but there is also this point: if they did not do their utmost to maintain a proper rate of dividend when they made profits, it would be more and more difficult for that company thereafter to raise more capital. The terms on which it would be able to expand its business would be worsened. Incidentally, when it comes to paying death duties, the ordinary shares are worth much less. It is not some peculiar kind of favouritism, which I think in another connection is called open favouritism, which causes directors to decide to distribute a dividend; it is because when the circumstances reasonably justify it, it is their duty to do so; and though sometimes for want of profits they cannot do it, they have to consider the claims and the interests of their own enterprise and of the dividend owner, as well as the claims on reserves.

Your Lordships will observe that what is here proposed is not to stop the paying of increased dividends; it is a question of whether the directors' duty to ordinary shareholders does not require them, if it is possible, to pay the same dividends as before. When you talk about a freeze in wages what you mean is that wages should not go up. Is a freeze in dividends, in the sense of saying that, if possible, dividends should not go down, an abominable thing? In the case of dividends, what is sought is to avoid, if it can properly be done, a shrinkage. The issue in the case of wages at the present time is whether there are good reasons which would justify restraint on an increase of wages. But if the pound becomes less valuable, in both cases the money paid, whether it is in dividends or as a wage, loses its purchasing power in exactly the same way.

Then my noble friend briefly advanced an argument connected with a much more difficult matter, and one on which I step with real delicacy—namely, the subject of whether or not this tax will operate in an anti-inflationary way. You must not say "deflationary" in these days; the word is too short. We must say "anti-inflationary."

LORD PAKENHAM

Or "disinflationary."

VISCOUNT SIMON

Yes, that is a very long word too. What really will be the effect of this tax? It seems to me that the effect of this tax in reducing the spending power of the shareholder will be trumpery as compared with the disadvantage which it will bring about in discouraging reserves. I quite agree with the noble Lord that nothing could be more important than reserves, especially in these times, because plant is difficult to renew especially when it is going to cost two or three times as much as the old plant. It seems to me that we were faced with very much the same argument (which was, I thought, a false argument) as when we discussed that "once-for-all" special contribution not long ago. Serious economists, like Lord Pethick-Lawrence, as soon as they looked at it, dropped that nonsense about the "once-for-all" special contribution being justified as an anti-inflationary measure, because it was nothing of the kind. It was, of course, produced by the Chancellor of the Exchequer in order to show that he was quite prepared to hit people who were supposed to be capitalists as well as others. In fact, the special contribution did not operate and does not operate as an anti-inflationary measure. It is paid largely by realising capital and, if you consider its effects as a whole, it seems to me to have had a disastrous influence on national savings, as I recollect Lord Mackintosh's deputation to the Treasury feared and warned the Chancellor of the Exchequer would be the case, for it showed to large numbers of people what happened if they did save.

Without any desire to take a partisan side, when the matter is thought out I do not think the economic arguments for this tax are very strong. I do not dispute that it has to commend it the fact that it has a psychological effect; and if it be necessary that the whole country should pull together to adopt such measures, well, that is to some extent an explanation. But I must say that I cannot think it is a justifiable way of looking at the matter, because, as I have pointed out, it is completely fallacious to suppose that because X is earning his income by a form of wage he suffers by devaluation, whereas Y, who is earning the same income out of a dividend, does not suffer. The two things are exactly the same. My own conclusion would have been that it is very difficult to find an economic justification for the tax. I do not want to make too much of it, because, when all is said and done, it produces £13,000,000. But the real explanation of it is that it is hoped by imposing it to create the impression that shareholders as well as wage earners are being made to bear a burden. That is perfectly right: they should both bear a burden, and so should we all. The misfortune is that, without this tax, shareholders are bearing that burden already.

7.15 p.m.

LORD RENNELL

My Lords, I regret that this subject of profits tax should have been taken in your Lordships' House at so late an hour after so much other business, because frankly I think the economic and political consequences—I say advisedly "political consequences"—of this profits tax are considerably more important than a great many people realise up to date. First, may I reinforce in the few remarks that I propose to make at this late hour what has been indicated by the noble and learned Viscount who has just sat down. The economic justification for this particular measure was stated somewhat otherwise, or with different emphasis, by the Economic Secretary to the Treasury in another place, when he put as the first reason and justification for this tax, that the rise in tax is intended first of all to restrain spending, and only in the second place did he quote some of the points which the noble Lord has made. With all respect to those remarks and to what the noble Lord has said, to talk about the purpose of a tax the net effect of which is to produce £13,000,000 as being to restrain spending, is just complete nonsense; £13,000,000 either way cannot make a particle of difference so far as the inflationary situation is concerned, more especially if, as the noble Lord will be the first to agree, what does affect the inflationary situation is not the amount that is distributed by way of dividend but very largely what the Government does with the taxes when they have received them. To use that argument is, to my mind, to vitiate the rest of what the Economic Secretary to the Treasury said in defence of this increase.

LORD PAKENHAM

I would like to answer the noble Lord because I do not consider he is doing himself justice in his remarks, and I am always anxious to help him. Is the noble Lord telling us now that, contrary altogether to the doctrines he has preached with such ardour and lucidity for the last two or three years, the inflationary situation is not affected by the policy of distribution of dividends one way or another?

LORD RENNELL

I think it is very much more affected by the policy of the Government in using the taxes that they collect. That, as a matter of fact, is what I did say and what I have said in the past. However, I want to pass on to his own particular point; and, in his remarks, the noble Lord has given me much more of a loophole than I had expected. He spoke about this tax as being an example of rough justice. He admitted that it might not fall everywhere exactly where it ought to, but he said that it would roughly justify itself as a rough measure of justice. In the economic situation in which we find ourselves it is not, I think, so important to consider whether a particular economic measure is one of rough justice or precise justice, as it is to consider whether or not it is expedient. It may well be that there is a psychological effect which is desirable, and to that the noble and learned Viscount has already referred. But Whether that could better have been achieved in this or in some other way is worth examining.

The consequences of this particular tax are—as I submit and propose to show—wholly inexpedient in present circumstances. One of the real difficulties in which I find myself, however, in commenting upon the economic and financial policy of His Majesty's Government, arises from the fact that they themselves do not foresee at the time they do things the consequences of what they do; and when those consequences afterwards become apparent they attribute them to totally different causes. In a recent debate in your Lordships' House on the economic situation, we had a fairly vigorous attack, or statement, by the noble Viscount the Leader of the House on what he appeared to regard as a conspiracy on the part of economists, business people, financial journalists and journalists everywhere to diminish and depreciate the efforts of the Government. That is a typical example of not foreseeing the consequences of what one does. That reaction was the direct consequence of cuts which, in the estimation of people in this country who are supposed to know and also in the estimation of people abroad, were considered to be insufficient. Because there was criticism that they were insufficient, that criticism was attributed to a conspiracy to depreciate the efforts of the Government.

Here we have another example of the same sort. This tax, which by the most optimistic showing can produce only a matter of £13,000,000 net, taking into account diminution in income tax which will be obtained by imposing a profits tax, will in my view have certain very clear consequences. I am not going now into the questions of incentive motives or risk-bearing capital—I will deal with those in a minute—but they have a direct bearing on the whole of our balance of payments. I will show exactly and precisely how that arises. If the noble Lord will cast his mind back over the interesting debates which we have had in this House on the balance of payments, he will agree, I think, that it has been stated that in the two or three years ahead the balance of payments will not, in fact, be rectified by the visible exports and imports of this country being made to balance; they will be made to balance (this is my view and certainly the view of the noble Lord, Lord Brand) only by the influx of capital from other countries—in other words, by invisible exports.

The principal sources of invisible exports of that sort—namely the investment of capital in this country, of which we are, on the admission of everyone on all sides, in very sore need because we are not creating enough capital ourselves to do everything we wish to do—are America or foreign countries. Is the scale of taxation under which large public companies, and companies generally, in this country are operating to-day such as to induce any American capital, for instance, to come into this country? The answer is certainly "No." Does an increase in the distributed profits tax on companies here help or hinder the entry of American capital that might have been hesitant before about coming in? The answer is clearly that it hinders. That fact has a further bearing on our present difficulties. As all your Lordships know, there is a very substantial amount of foreign capital and American capital in this country now. A great deal of it has remained here, the hope being that the situation would improve so that it could be put to more fruitful endeavour by investment in this country in industrial enterprise. But it has, in fact, been leaking out. Why has it been leaking out? Because prospects under the régime of company taxation here are now so black that no American or any foreigner who has money over here is likely to leave it here in order to invest it in this country.

It seems therefore that these economic measures which His Majesty's Government from time to time propose, should be regarded not only in the light of what is rough justice, but in the light of what it is expedient in our present economic situation to do or not to do. I suggest that an increase in the tax on distributed profits, however small, will have the result that people who have money here will take it away, and those who might invest money here will not do so. The noble Lord made some point about the number of applications made to the Board of Trade recently on behalf of enterprises for which there were insufficient resources in the country. He attempted to show from that that there was no lack of people here who wanted to invest their money in risk-bearing capital.

LORD PAKENHAM

It is a term which Lord Bland introduced.

LORD RENNELL

That is true. It means that there is not enough capital here to go round.

LORD PAKENHAM

If I may intervene, I would say, rather, that it means that there are not enough people in this country for us to go further than full employment.

LORD RENNELL

I should say that capital was not being created in this country at a sufficient rate to meet our needs. The only way to supplement the scarcity is to get the capital from somewhere else. We are not likely to get it from anywhere else by imposing penal taxation on capital being used in risk-bearing enterprises.

There is one point which I should like cleared up; perhaps the noble Lord will be good enough to deal with it when he replies. He spoke generally about the economic effects of the profits tax as a whole. I believe that a clear and sharp distinction ought to be made between a tax on distributed profits and a tax on undistributed profits, the consequences of the two being very considerably different. I do not entirely agree with the noble and learned Viscount in speaking of a common pool out of which all taxation has to come. I think that the order in which taxation is levied does have an effect. I have no doubt that, of the two profits taxes, a tax on undistributed profits is a great deal more vicious than one on distributed profits, because a tax on undistributed profits is a bar to the accumulation of reserves. I would go so far as to say that if the present proposal had involved merely an increase in the distributed profits tax, accompanied by a pro tanto or smaller decrease in the undistributed profits tax, I should feel much less opposed to it than I do now.

I would now like to ask the noble Lord to look at some figures, with which no doubt he is familiar. When one does this, I suggest, one begins to wonder whether a profits tax has any economic justification as opposed to a psychological one. The noble Lord will have seen a recent analysis in the Economist of the profits of a large number of companies—in point of fact, nearly three thousand companies whose reports were published between October, 1948, and September, 1949. The total profits tax figure, which I take it includes both distributed and undistributed profits tax, is only £119,000,000. On the total Budget that is a relatively small sum, and I wonder—and here I come back to the question of expediency—whether if this matter had been examined from a long-term economic view, instead of from a short-term psychological one, it would not have been more equitable and reasonable to leave industry with a larger proportion of earnings in the form of undistributed profits free from tax, to accumulate for reserves and replacements, than to extract from industry so small a sum. Actually, the net sum is a great deal smaller than £119,000,000, because that has to be taken into conjunction with income tax, and the net amount is something of the order of £60,000,000. in the light of the scale of our taxation as a whole, would it not have been much better to leave that £60,000,000 in company reserves than to take it into revenue and use it for the purposes for which we know the Government use it?

In considering this profits tax in connection with the w hole question of taxation, one ought to be guided by expediency rather than trot out some rather trumpery arguments about the dis-inflationary effect of taking another £13,000,000 from this source.

7.32 p.m.

LORD PAKENHAM

My Lords, as usual I am in the hands of the House at all hours, and I am ready to continue the discussion for a considerable time, but I imagine that is hardly the wish of your Lordships. I acknowledge the few kind words used about me by the noble and learned Viscount. He is such a Goliath of debate, and I am such a David, that he must forgive me if I make use of a sling to cast a tiny projectile in his direction.

VISCOUNT SIMON

So long as the noble Lord does not hit me in the eye!

LORD PAKENHAM

I know that is rather unfair, but no one can stand it more easily than he. I cannot help bringing together what the noble Lord, Lord Rennell, has said, rather contemptuously, about rough justice and what was said by the noble Viscount in 1937 about rough justice. When the noble Viscount was introducing, very wisely I am sure, what was a profits tax of 5 per cent. in some cases and 4 per cent. in others—I am referring to the National Defence Contribution—he used these excellent words: Let me come to a major point of the scheme. The Committee will observe in the White Paper…we suggest there should be a tax of 5 per cent. in the case of companies and of 4 per cent. in the case of partnerships or individuals…What is the reason for that? Of course the reason is, as far as may be, to produce equal treatment. It can only be done as a measure of rough justice… When a five per cent. profits tax was placed before the public by the noble Viscount, much more eloquently than by me, the argument about rough justice was very properly imported into the discussion.

VISCOUNT SIMON

My Lords, I am very willing to receive that or any other projectile from the sling of the noble Lord. I do not seem very hard hit. Of course, the distinction was that companies go on and partnerships change, and it was necessary, as has been found necessary in many other connections for the purposes of taxation, to draw a distinction between them. That is all.

LORD PAKENHAM

The noble Viscount is not averse to using the argument of rough justice when he finds it suitable. Therefore, I am sure the noble Viscount would not wish me to apologise for using the same argument to appeal to the noble Lord, Lord Rennell. There are two main arguments in this connection which I feel sure we shall wish to explore on other occasions and I shall say little about them to-night; and there is one argument about which I will say a few sentences. The first main argument advanced by noble Lords against the Bill is that it discourages foreign investors. As to that, I should point out that the subsidiaries of foreign companies are liable to the lower rate of tax of 10 per cent. I do not wish to put it too crudely, but the Government do not feel that in making our broad economic and social dispositions in this country we must he guided mainly by the view which foreign investors take of our economy. We want our national credit to stand very high, but we cannot accept the view that our Health Service and our other great social provisions, agreed to by most of us, should be cut down at the whim, and it may be under the more careful calculation, of some foreign investor, whether American or otherwise.

The second main argument is this. The noble and learned Viscount raised an issue which seemed to me to lurk behind the whole of the discussions in another place. He said that we must all accept the principle of equality of sacrifice; but, unless I misunderstood him, he said that already the sacrifices being borne by the profit receivers are so great that no further sacrifices can reasonably be expected of them at this juncture. When new sacrifices are required at the present time, the noble Viscount does not feel that profit earners should bear their share of them. That is not my idea of equality of sacrifice at the present time. The noble Viscount thinks that the work of the Government in balancing our economy has been carried too far in one direction. We take great pride in the measures carried out by this Government and the consequent redistribution of wealth. There is that difference between the noble Viscount and me, and I can only say that we take completely different views on that issue.

I come to one matter which arises closely in connection with the present Bill. The noble Viscount suggested, and the noble Lord, Lord Rennell, suggested perhaps more strongly, that it was nonsense—I think that was the word the noble Lord used—to attribute any disinflationary effect to this Bill. It is only £13,000,000—what is £13,000,000 in this connection! I do not want to twist the noble Lord's argument, but it could be twisted with no great difficulty to point the conclusion that a larger tax would have some effect and might therefore receive the approbation of the noble Lord. I do not imagine he means that, but his argument would lead in that direction. May I repeat that, taken alone, the £13,000,000 has a small economic effect, but it must be considered as part of a complexity of measures, of which the others did not require legislative sanction and are broadly described as "cuts."

The noble Viscount said he did not feel there was an economic argument for this Bill. I am not complaining about his reception of the Bill—on the whole, I thought that he was much kinder than the noble Lord—but he did say that he did not feel there was a solid economic argument for this measure, because it can do so little. Let me put it in a couple of sentences. The economic effect of all these emergency measures is strong and real and there is no nonsense about it at all. They represent an essential provision at this time. Because £13,000,000 is only a small part of the economic steps being taken, the economic effect of this one measure is small. The economic argument, therefore, carries us to support of the economy measures as a whole.

Then I come to the psychological argument. Here there are two arguments: the moral argument—the argument for justice—and the psychological argument, that justice must not only be done hut must seem to be done. Once it is decided to impose a tax of a certain magnitude or complexity, then it becomes a moral and psychological issue as to how that tax or those cuts are to be distributed. Then you come to the point that if the main burden will fall on the poor, part of the burden, at any rate—call it footling, call it moderate, or what you will—must fall on the profit-earning section of the community.

The noble and learned Viscount, Lord Simon, raised a number of other points, and perhaps on another occasion we can deal in detail with his contention that the profit receivers are not, broadly speaking, better off than the wage earners, if that is what was in his mind.

VISCOUNT SIMON

If some of them are, they are taxed very much more.

LORD PAKENHAM

I can only say that the burden must fall more heavily on the broader hacks. We are back on the old argument. The noble Viscount feels that already taxation has been carried too far at the expense of the rich. We on this side do not accept that. We approach this particular measure in the light of asking for equality of fresh sacrifice at this time. I appreciate the attitude of the noble and learned Viscount, and also the attitude of the noble Lord, Lord Rennell, although I may not seem to. I hope the House will give this Bill a Second Reading, and I am grateful to noble Lords for having helped it through with such considerable speed.

On Question, Bill read 2ª: Committee negatived.

Then, Standing Order No. XXXIX having been suspended (pursuant to the Resolution of November 17), Bill read 3ª, and passed.